Does the arrival of smart legal contracts presage the “Susskindesque end of lawyers”, genuinely creating the scenario of “Code Is Law”? Of course not, says Akber Datoo, CEO, D2 Legal Technology, rather, it creates both opportunities and challenges as part of the broader digital agenda.
As both a lawyer and a computer scientist, Akber explains why smart legal contracts increase, not decrease, the need for both the law and lawyers – and calls for legal experts to rapidly extend their skill set to embrace technology and data.
There are no specific barriers in English Law to the adoption of smart legal contracts. Defined by the Law Commission as: “A legally binding contract in which some or all of the contractual terms are defined in and/or performed automatically by a computer program”, their work in this area published on 25 November 2021, states: “We have concluded that the current legal framework is clearly able to facilitate and support the use of smart legal contracts. Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of the common law in specific contexts. In general, difficulties associated with applying the existing law to smart legal contracts are not unique to them, and could equally arise in the context of traditional contracts.”
Clearly, the definition and this statement is just the beginning of the journey, seeking to encourage innovation to fulfil the commercial promise of the Smart Legal Contract – which is compelling. It is expected to revolutionise business over the next decade. Its adoption is, however, not without its challenges – as arguably, is any significant evolution in any field.
The Solution to Trust is not just the Immutable Contract
As soon as a smart legal contract is placed on a Distributed Ledger Technology (DLT), the agreed automation is unchangeable. On the one hand, this is the very attraction – removing the need for trust between both parties – the trust is placed in the code. But that also means any failure in that code cannot be amended. Essentially, while the smart legal contract is not immune to legal intervention and other forms of governance, resolving a problem is extremely difficult.
For example, what happens if it turns out the smart legal contract was illegal? If there was fraud involved? If someone made a coding error? Or simply that circumstances have changed? The automation cannot be stopped. Even if the courts might rule that it should stop, the technology cannot be halted. The only option will be to set up some form of reverse transaction to make the adjustment. Far from an ideal situation.
The use of DLTs for smart legal contracts highlights a severe lack of ‘after the event protection’. Traditional contracts encourage the growth of trust during relationships between the parties, especially relationship level agreements such as the ISDA Master Agreement (“famously referred to by J Briggs in the Court of Appeal as ‘[…] probably the most important standard market agreement used in the financial world”). They include flexible tools, such as the use of elastic and flexible terms such as ‘acting reasonably’ and ‘good faith’. In addition to this, there is the ability to seek mutually acceptable outcomes should the truly unexpected occur to the surprise of the parties, through mediation, arbitration – or the backstop of the courts themselves.
These are not concepts that can be applied to the purist “code is law” philosophy that underpins some views of how smart legal contracts ought to evolve. This results in a language of automation that is restrictive to business and the code unstoppable. Yes, we require a degree of immutability and automation – but the law is king over code, and smart legal contracts need to be designed to allow the law to intervene if we are going to allow the use of smart legal contracts for serious commercial transactions.
To make smart legal contracts work correctly given their immutability and automated nature, both parties need to know – or attempt to know – every possible event that may happen in the future which is, of course, impractical for most reasonably complex business transactions. Who has the expertise to ensure that every contingency (including mandatory actions ordered by a court of law) are considered and agreed between the parties (in the code)? The truth is, even in order to imagine and provide for some of those scenarios if we are going to empower the code, the role of the lawyer will become more important than ever.
A large part of a lawyer’s job is to tease out the needs and desires of a client, smoothing out contradictions and flagging potential eventualities. Programming a smart legal contract is tantamount to translating those intentions into code – which is great, if both parties are in control of that code. Yet the model being proposed by many in the industry is for lawyers to design the smart legal contract as usual and then hand it over to a developer to draft the code.
Traditional contract interpretation is hard enough. This new world merely exacerbates the difficulties. Does the coder truly understand the law effect being sought by the lawyer? Does the lawyer truly understand the operation of the code being put in place by the developers? Any mistakes, any errors or misinterpretations will have a significant and severe impact because the smart legal contract is (as suggested above), largely immutable. It is now vital for lawyers to understand code and operate in this digital sphere. Lawyers need to be able to test a software program, just as they test scenarios anticipated by a contractual clause today. The difference will be rather than using natural language prose, the testing will be done through the context of high-level programming code – debugging through the code (that does look like natural language – yes, Solidity, Rust, Vyper and other smart legal contract code is not practically written in 1s and 0s, rather resembles natural language by design!).
Smart legal contracts are a long way from reaching maturity. There are many issues to address. As noted above, a degree of reversibility will have to be created, otherwise there will be a finite limit on the potential complexity and value of these automated agreements. But the shift is hugely exciting and offers enormous potential to the industry – if the right steps are taken.
Calls from some quarters for smart legal contracts to be based upon natural language so that they can be understood by judges will place a serious limit on the extent to which they can be deployed. Challenges around the management of complexity will constrain the use of automation with any degree of sophistication. It will also create the risk that firms could be sued for negligence due to mistakes in the coding phase leading to contracts failing to achieve the goals of both parties. Calling for natural language and translation is a short-sighted approach and one that will not only delay the inevitable increasing adoption of automation but also add complex layers of failure.
Smart legal contracts offer a great deal of promise. However, there is a huge amount to be done by the legal community to embrace, explore and understand if that promise is to be realised. Not only will skills and toolkits need to change, but lawyers must play an imperative role in understanding the true limits of automation and determining where good, old fashioned human judgement remains king. The onus is now on lawyers to take ownership of smart legal contracts, discover and embrace new skills and gain the confidence required to accelerate maturity – without that committed smart legal contracts will, at best, fail to deliver on their promise and, at worst, create a global legal mire that could take generations to unpick.